Q2 2023 Triumph Group Inc Earnings Call
[music].
Welcome to triumph group's second quarter fiscal year, 'twenty 'twenty three results conference call.
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I would now like to introduce Tom quickly triumph, Vice President of Investor Relations mergers and acquisitions and Treasurer, who will provide a brief opening statement.
Thank you good morning, and welcome to our second quarter fiscal 2023 earnings call.
I'm joined by Dan Crowley, the company's Chairman, President and Chief Executive Officer, and Jim Mccabe, Senior Vice President and Chief Financial Officer.
During our call, we'll be referring to supplemental slides, which are posted on our website.
Certain statements on this call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
These forward looking statements involve known and unknown risks uncertainties and other factors, which may cause <unk> actual results performance or achievements.
Really different from any expected future results performance or achievements expressed or implied in the forward looking statements.
Please note the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on our website attract group dotcom.
Dan I'll turn it over to you.
Thanks, Tom earlier today, we reported our second quarter results for fiscal year 2023.
Late in the first half of fiscal 'twenty three marks the long anticipated inflection point triumph.
As we transitioned from years of cash used to positive cash flow in the second half of the year.
In addition, we delivered solid organic growth.
Driven by backlog expanding at double digit rates as commercial volumes return.
Slide chain constraints continue to be a headwind leading to delays in sales in the quarter.
This headwind was concentrated in our defense programs, but the active management of our supply chain has enabled us to mitigate the impact on triumph.
Our continued focus here as well as our visibility in our backlog and pipeline.
How's us to remain confident that we are able to achieve our current full year guidance.
Overall, our Q2 results were in line with our expectations.
With pieces of our business exceeding them more to come on that.
On slide three I would summarize the quarter's highlights first we generated organic growth of 6% sequentially and 13% year over year, driven by improving commercial OEM and MRO demand.
Production of parts for MRO stepped up 11% sequentially in Q2, as both narrow and wide body flight hours recovered.
As a result of supply chain shortages Q2 margins were level with the prior year quarter and are expected to step up in our Q3 and Q4 sequentially with year end shipments.
We have a clear line of sight on parts availability to support planned shipments and maintaining the high end of our revenue guidance.
Backlog is up 11% as trying to realize the benefits of our diverse products and markets and customers.
So the pipeline of over $11 billion and opportunities strategic wins on new platforms.
And increasing R&D expenditures on differentiating technologies.
We anticipate strong revenue increases over our planning horizon of fiscal 'twenty four to 'twenty eight.
We expect to be cash flow positive over the balance of fiscal 'twenty three and beyond.
With material reductions in past due backlog inventory and working capital.
<unk> in Q3 and Q4.
Now I'll provide my perspective on the industry and how it relates to triad, starting with the supply chain and then OEM rates.
Private continues to proactively mitigate supply chain challenges, which is less than the impact on track relative to the market.
Let me share what we're seeing and what we're doing.
On Bill rates trials has received firm purchase orders from the Oems, which support our full year outlook. We remain in close communications with the Oems on out year build rates to optimize our working capital levels.
Supplier shortages resulted in deferred sales of approximately $22 million in Q2 and associated margins and cash that said our efforts to dual source work.
From low cost sources has softened, but not fully mitigated shortages.
We track supplier on time in full or <unk>.
Which is a measure of kit completed this.
The top level assemblies can be completed on time.
<unk> was as low as 74% in April it.
It has improved month over month to the mid eighties.
We are focused on critical shortages competing deliveries.
We anticipate achieving <unk> levels of greater than 90% by the end of the fiscal year, which supports our full year guidance.
Last year, we revised our policies to provide 24 months demand forecast to our primary suppliers as well as strategic order coverage beyond lead time to secure allocation to protect our most critical programs.
While our suppliers are not yet achieving 100% on time performance we expect.
This incremental progress will enable triumph to burn down approximately $40 million.
Past due backlog by the end of fiscal 'twenty three.
Castings and forging providers have been the largest sources of shortages.
As such we are expanding our additive manufacturing applications on items, such as housings actuators and heat exchangers.
To reduce our long term dependency on these long lead and capacity constrained sources.
Our top supply chain priority remains to secured near term delivery assurance to ensure we achieve our fiscal 'twenty three revenue plan.
We continue to partner with our customers and suppliers to ensure continuity and affordability.
On the cost side, we continue to work with our suppliers to.
To mitigate potential price increases while also sourcing from alternative suppliers with lower costs where possible.
Along these lines trapped awarded contracts to new suppliers in India, and Thailand in the quarter.
As these countries expand their investment in A&D.
As a result, these increases are typically total less than 2% of sales.
And we expect any impact to be immaterial to our results.
Primes cost reduction plans go beyond our supply chain.
We set a goal to generate $49 million in cost savings in fiscal 'twenty three.
42 million of which are related to internal costs.
Year to date, we've generated $40 million in savings.
Looking at OEM rates, the commercial aviation market continues to recover.
Although paced by the ability of suppliers to support desired ramp rates.
Travel demand continues to strengthen that.
The global commercial fleet has returned to 91% of pre COVID-19 levels with 96% of single aisle aircraft and 74% of twin aisle aircraft return to active service.
There are other encouraging signs in the quarter for the twin aisle segment as Boeing booked orders for 60 twin aisle aircraft, including 16, 780 Sevens from China Airlines.
Other Boeing resumed deliveries of the 707 in August any overnight in the quarter, while Airbus delivered 13, <unk> hundred <unk> in the quarter.
We anticipate rate increases on the 787 to follow this is welcome news given tribes substantial ship set content.
These platforms, which includes the entire suite of hydraulics and actuation for the 77 landing gear system.
We are currently delivering 77 at <unk>, 2% to two five per month with.
With a ramp to rate for anticipated early next year.
Boeing forecast returned to rate five in late calendar year 2023.
And right 10 and 2025.
After large increases in OEM narrow body build rates from pandemic lows the.
The commercial Oems recently delayed the next step up in production rates by six to nine months to let the supply chain catch up.
Clients had already lowered demand forecast for narrow body deliveries in our internal plans.
Most of our plants are producing Max components.
At 26% to 31 ship sets per month.
And 45% to 48 per month on the <unk> hundred 20 family.
She has been key to organic sales growth I mentioned.
Engine delivery push outs in Q2 on programs such as GE leap have already started to reverse.
As OEM supply chain catch up as a result of prudent slowdowns, which will benefit our second half of the year.
Short term increases in inventory are expected to burn off in our second half benefitting free cash flow.
While we look forward to even higher OEM rates, the recent rates stability and gradual supply chain recovery.
Enforce the bottom is in for our commercial end markets.
We look forward to providing our fiscal 'twenty for revenue guidance with the latest OEM rate increased profiles.
This macro backdrop try and continue to see increasing demand across our markets as the aviation market recovers.
Areas of strength include recovering OEM rates strong MRO demand and partnerships.
Q2 saw our systems and support segment book to Bill up 34% year over year with Q2 bookings up 15%.
This is primarily driven by increases in commercial OEM and MRO end markets. While military backlog was also up a more modest 4% I'll touch on military more in a moment.
Prime's backlog growth is the best leading indicator of top and bottom line expansion.
<unk> backlog is up 10% year over year.
With Boeing 737 backlog up 40% at 35 up 60%.
And the CH 53, K backlog up in excess of 100%.
MRO inductions are up as air transport and freight traffic expanse and.
And we continue to progress to expand our market reach geographically securing industry, leading aftermarket partnerships.
We recently announced our partnership in the Middle East with Mubadala Senate, which will provide in country access to the region's MRO markets and enable us to accelerate growth in engine accessory repair.
We expect this partnership to provide incremental sales starting early in fiscal 'twenty four.
Beyond forecasted increases in demand enhanced pricing from recent contract extensions are starting to cut in especially where we are the design authority, which supplies to about 70% of our products.
Or where we are sole source, which is the case for 90% of our products, excluding our third party MRO business.
Taken together, our growing backlog and improving mix of OEM and aftermarket business.
Support our goal of doubling profitability over fiscal years 2022 to 2025.
Let me provide supporting facts on where we are on winning and how it affects our product mix.
We set a goal in fiscal 'twenty, one to generate 25% of our revenue from new customers and solutions.
Since that time, 40% of Trump's awards are associated with new products <unk> new customers.
<unk> for the quarter totaling more than $200 million can be seen on slides four and five.
These wins are driven by try of IP on a number of products, including airframe mounted gearboxes for the Nexgen military platforms.
Hydraulic control valves on future vertical lift helicopters turboprop engine controls thermal pump packs and rotorcraft digital engine control upgrades.
<unk> MRO businesses are growing with new inductions up 26% year over year and recent awards across platforms in both military and commercial programs.
New MRO customers added year to date include DHL Bahrain.
Star BB AAM aircraft leasing.
Irish are core and Goodrich Foley, Alabama.
The military market, which expanded during the Covid downturn is stable with continued U S government demand.
While military sales were down in the quarter backlog is up bolstered by geopolitical events and subsequent Fms sales, including 96 age 64, so Poland 30.
<unk> 35 F 30, fives to Germany.
And $24 35 to the Czech Republic.
Additionally, we are experiencing resurgent orders for the M. Triple seven howitzer, a British vehicle towed artillery for which drive supplies magazine Assembly components.
<unk> is actively developing IP to support a new military platforms in the form of next generation gearboxes valves fuel pumps actuators landing gear systems and vapor cycle cooling systems on multiple platforms currently under development.
These upgrades are needed to address aircraft electrification higher fuel efficiency demands.
And the higher heat loads associated with electronic warfare.
In the quarter <unk> secured roles on the next Gen engines. The digital series fighters in the Army's new helicopter platforms that will benefit our fiscal 'twenty four 'twenty eight planning horizon.
Watch for triumph orders as Oems Prime Awards for these new systems are announced.
Fiscal 'twenty three also market increase in the breadth of electric aircraft ventures beyond the VTOL or air taxi space.
We are actively engaged in five programs, providing a mix of gearbox solutions installation landing gear solutions and actuation for freight regional transport and urban mobility segments.
Landing gear actuation and gearbox components remain essential to electric aircraft, playing to try and strengths we.
We will share more information on these programs as they mature.
Bottom line, despite short term flat spots and commercial rates and timing issues caused by supply chain shortages.
<unk> continued to deliver on our commitments to our customers.
And to meaningfully grow backlog.
Okay.
We remain on our path to value through this dynamic A&D cycle.
We kept our momentum going during the downturn and expanded our partnerships products and services, which are now forming the foundation for our future growth and margin expansion.
Jim will now take us through results for the quarter in more detail Jim.
Thanks, Dan and good morning, everyone.
As I review the financial results for the quarter. Please refer to the presentation posted on our website. This morning.
I will be discussing our adjusted results. Our adjustments are explained in the earnings press release and in the presentation.
<unk> second quarter results met our expectations and we are on track to achieve our full year financial objectives.
Our consolidated results for the quarter are on slide eight.
Revenue of $308 million reflects increased volume from narrow body platforms offset by decreased military rotorcraft volume compared to last year.
Excluding revenue from divested businesses and sunsetting programs and despite the current market environment. We grew consolidated revenue, 13% organically over the prior year quarter.
Adjusted operating income of $30 million represents a 10% margin up from 8% a year ago and includes the impact of decreased military rotorcraft sales more than offset by a favorable closeout of legacy programs the sale of certain noncore IP.
And tailwind from commercial narrow body production rate increases.
Adjustments this quarter include a $104 million gain on the sale of businesses primarily.
Primarily from the Stewart divestiture that closed on July one.
And $2 million of restructuring costs from an aftermarket product line, we exited in the quarter.
Systems and support segment results and highlights are on slide nine.
Organic revenue was up 13% in the quarter, including decreased military rotorcraft sales primarily from supply chain delays.
But more than offset by higher commercial narrow body volume and a sale of certain non core IP.
System to support operating income was $43 million or 16% margin, which is up slightly from the prior year.
As Dan noted, we benefited from the commercial market upswing with commercial OEM sales up over 30% in the quarter over last year.
Results for our structures segment are on slide 10.
The continuing business in this segment as the interiors insulation Inducting business.
Excluding divestitures and sunsetting programs.
Structures revenue of $33 million was up 14% organically.
737 production rate increases and interiors contributed to the organic growth, partially offset by lower wide body sales, which are expected to rebound.
Operating income improved with the favorable closeout of certain $70 seven obligations and volume driven recovery in the interiors business.
Our free cash flow walk is on slide 11.
Our $24 million of cash use this quarter included $17 million of working capital growth to support the ramp of our second half sales.
As for our quarterly cash flow cadence, we expect our usual seasonality with approximately breakeven cash flow in Q3 and strong cash generation in Q4 in line with our full year cash flow commitment.
We continue to expect capital expenditures of approximately $30 million for the year as we upgrade and expand our capacity for efficiency and to support new programs and future growth.
The schedule of our net debt and liquidity is on slide 12.
At the end of the quarter, we had just under $1 $5 billion of net debt.
We had about $150 million of cash and availability, which is more than sufficient for our projected needs as we pivot to positive free cash flow generation.
We expect to be profitable and cash flow positive for the balance of the year.
We are continuing to reduce our leverage as planned by expanding EBITDA and free cash flow in our continuing businesses.
We're currently benefiting from our below market fixed rate debt in this rising interest rate environment.
Of course, we regularly review our capital structure with our advisors and board.
Paying close attention to the capital markets.
Main nimble and opportunistic for when the Windows open to improve our balance sheet before our next bond maturity in June of 2024.
Consequently, we are confident in our ability to reduce our leverage improve our capital structure and address our debt maturities with a series of timely balanced and constructive actions that I look forward to sharing as we announce and execute them.
Okay.
For our full year guidance turning to slide 13.
Based on expected aircraft production rates and the resulting demand on each of our facilities. We expect FY 'twenty three revenue to approximately $1 3 billion.
We are increasing our GAAP EPS guidance by <unk> 15.
<unk> to $1 66 to $1 86 per diluted share.
We are increasing our adjusted EPS guidance range by <unk> <unk> to.
To 40 to 60 per diluted share due to a higher pension income estimate.
We continue to expect cash taxes net of refunds received to be approximately $7 million for FY 'twenty three.
And the interest expense is expected to be $129 million, including $123 million of cash interest.
For the full year, we expect to use 30% to $40 million of cash from operations.
Approximately $30 million of capital expenditures, resulting in free cash use of $60 million to $70 million in fiscal 'twenty three.
In summary, despite some temporary supply chain challenges, we were able to identify and execute actions to meet our commitments and our Q2 results are in line with our expectations.
We remain on track to achieve our full year guidance.
And our multi year financial objectives.
Now I'll turn the call back to Dan Dan.
In summary, our second quarter results achieved in a challenging macro environment position us to deliver positive free cash flow and expand top and bottom lines in the second half of our fiscal year.
This in turn will provide a strong jumping off point for fiscal 'twenty four.
While I can't come fast enough the commercial market recovery is happening with.
With rapidly improving MRO uptake closely followed by OEM rate increases.
Our systems and support backlog meaningfully grew in the quarter and our strong book to Bill of 131 year to date confirms that our go to market strategies and pursuit of new customers products and services are working.
Triumph remains on track to achieve our full year objectives I look forward to reporting on our progress as we continue to unlock the hidden value across our streamline business and to deliver value for the benefit of all our stakeholders.
We're happy now to take any questions.
We will now begin the question and answer session.
We ask that you limit yourself to one question and one follow up to give everyone the opportunity to participate.
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At this time, we will pause momentarily to assemble our roster.
And our first question will come from Seth Placeman of Jpmorgan. Please go ahead.
Thanks very much.
Everyone.
I wonder.
Tim if you could quantify.
Two things I guess first of all the <unk>.
From the slide the IP sale.
In systems and support how much.
How much earnings that provided and then also how you think about the go forward margin in structures because it was it was almost 20% in the quarter, which is.
Actually better than.
Better than systems.
Even at the low production rates were at now and so anything that might have been unusual there and how to think about that going forward.
Sure.
So on the IP sale, we did as opportunities to monetize some IP was legacy programs that was strategic for us to do that it was about $15 million of sales.
And it was high profit cause lot of expenses were incurred in prior periods. So that profit was probably in the low teens.
So thats one way, we closed the quarter and we have levers to pull every quarter.
So we're pleased to be able to do that to meet our commitments for this year in this quarter.
In terms of the margins in structures, Yes, we did have good margins, we continue to work through the remaining vendor liabilities on legacy programs.
And so there was Kim catching there.
I think that overall Kim cash of the company was about 8 million positive for the quarter and majority of that was related to closeout favorable closeout of those legacy liabilities, there's not a lot more of that left.
But also in the background as interiors continued to perform.
In that segment. So we're seeing an upswing based on some 37 Max volumes going through there as they were kind of breakeven ish, they're turning to profitability and they have very strong growth forecast for next year and the interiors segment.
Great Great. Thanks, and then maybe as a quick follow up you mentioned being being nimble with regard to you the <unk>.
Capital structure can you talk a little bit about how you balance.
The desire to.
See some more improvement.
And positive cash flow.
Before addressing the capital structure versus kind of the need to.
The need to take care of that sooner rather than later and how youre thinking about balancing those two things.
Yes, well.
I mentioned that we pay close attention to the market because you have to go to the market. When the market is really not necessarily when you want to so you have to look for windows.
Our next debt maturity is not until June of 'twenty four.
And we're enjoying very low fixed rates right now, which you won't enjoy as long as possible, we wanted to be positioned to refinance.
Our forecast has us improving our cash flow and improving our profitability. So we're going to naturally deleverage over time, and we're going to look for those windows and we're getting good advice and we have good plans in place with multiple options to execute.
Great. Thank you very much.
The next question comes from Sheila <unk> of Jefferies. Please go ahead.
Okay.
Good morning, Thank you guys so much.
I wanted to maybe ask about free cash flow.
Jim you've been very good about talking about it and how we think about the sequential improvement.
I think it was $21 million free cash flow call.
How do we get to the fall.
All year and how do we think about.
Yes.
Any onetime items in that.
Otherwise.
Thanks Sheila.
We've had a lot fewer onetime items than previous years in previous quarters and year to date. We did have 17 million of cash use in Q1 from the Stewart business, which is now gone.
And we had $4 million of cash cut down costs in Q1 as well.
We really don't have any in this quarter, that's why you'll see on the slide that nickel anyhow for the quarter, So theyre behind us, it's a pretty clean quarter.
Seth did mentioned the.
The sale of the IP that only brought $5 billion of cash in the quarter.
But we had those kinds of things we're in the business of developing and selling IP, whether it's directly or as part of our product.
So.
Cash flow cadence moving forward, we're looking at breakeven ish in the third quarter.
And <unk>.
Solidly cash positive.
Those are the trends in the business, but also because of our seasonality in Q4, so $50 million to $60 million of cash generation in Q4 and that gets us into a range of using only 60 to 70 for the year and then moving forward. We're looking to be cash positive every year going forward there'll still be some seasonality, but we're on the right track, we're excited about pivoting to growth and cash flow and profitability.
Great. Thanks for just reiterating that I'll jump back in the queue.
Okay.
The next question comes from Myles Walton of Wolfe Research. Please go ahead.
Thanks, Good morning.
Jim I was hoping to just follow up on that for a second I think the original guidance had about 70 million of onetime or nonrecurring items in it and <unk> got 21 year to date as they are still anticipated to be 50 in the back half or.
Are the one times less vicious and.
And you really reiterating the full year free cash flow.
Yeah. Thanks, Myles the I guess the way you said it.
The one times are less vicious and that's true because we've been mitigating them and thats part of the pickups were talking about.
Structure segment as these lingering liabilities and been able to negotiate them down.
Reduce them. So there are a lot less and right now, especially with the advances gone remember, they're all gone with the structured divestiture.
There's really very little nonrecurring moving forward for this year.
So is there something in the operations Thats offsetting the goodness of the nonrecurring going away.
Right now in terms of cash flow I would say, it's the inventory growth because of the supply chain challenges and you saw we had $87 million in the first half of the year of working capital growth that was only $17 million in the past quarter and it will reverse itself for the second half now that's our normal cadence.
The way because of seasonality, but its been exasperated by the supply chain challenges, we're working through them and we think we're as good as if not better than others and mitigate supply chain challenges, we have a great organization doing that globally.
And we know we're going to be able to manage them.
Okay. Dan one question for you if you look at the defense portfolio. There are a couple of programs in there that maybe not next year sunsetting, but certainly over the next few programmatically it looks like they do.
Something like the V 22 can you describe the sort of flexibility in the cost structure you are planning towards that.
You have.
An off ramp as those programs nationally wind down and whatever new business comes along.
Yeah. Thanks, Myles the cadence on V 22 is really high both on OEM and MRO.
<unk> acquired the spares and repair units in the aftermarket.
A lot of orders queued up with us in the short term.
And there is some mods that are happening to improve the ability of those actuators to work in a high dust dirt environment that we're cutting as well. So the platform has got a lot of life.
We are.
We're diversifying the makeup of the work at our gearbox business.
We're on new starts like the <unk>, where we do the accessory mounted.
Drive gearbox drive.
We're on it.
<unk> on the commercial side, and we're winning content on the new for future vertical lift.
<unk>, so even though the 22 may come down.
And in the future, we're not worried about it we're busy now and more on the new platforms.
Okay, Alright, and just one cleanup one pension Jim is there any outlook on funding requirements. There I know theres been obviously movement on discount rates and asset returns, but is there a look that funding will be required some time in the near future now.
Yes, so annually, we do the funding forecast at every fiscal year end.
And there was no material funding over the next four years when we did that at the end of March as we all know the world has changed in terms of asset returns and interest rates during that time period to the next firm calculation will be doing it at the end of this fiscal year, but we did note that we do expect there will be some funding based on current market conditions and current interest rates if they don't change before.
At the end of the fiscal year. So there is a headwind on pension funding should things change.
But not in the near term next year's not going to be significant it's really the out years, two three and four that.
It might be impacted but we will know more specifically at the end of this year.
Hey, thanks for the questions.
The next question comes from Kellwood.
Of Cowen. Please go ahead.
Yes. Thank you very much I guess to follow up with SaaS question about how youre thinking about refi and you make the point that.
Basically a refi would be done.
Likely be download.
Considerably higher rate and given the level of your cash flow it looks like.
Refi just in terms of the ongoing.
<unk> would take a fair bite out of that so is it fair to assume that given your business prospects look like they're getting better that you are more inclined to kind of wait.
And see and enjoy the current lower interest rate.
Scott.
Yeah. Thanks, Scott.
I don't think its a conclude before gone conclusion that our rates would be higher.
Part of being measured in your approach and look at your timing and we do have time, we're about 18 months before our next maturity and we are enjoying an improving business. So with our cash going positive in our profitability, increasing and where to look for those windows.
And execute in a balanced way of the refinancing is necessary to continue the business. So I hope that answers your question.
Okay. No. That's very helpful. And then spirit basically had a situation where there are OE customers asked them to slow down deliveries because they are not producing their indicated line rates is that a risk for you I mean your rates look like they are a little lower but.
It seems like things are bouncing around all over the supply chain. So is that something we should be concerned about.
So we went ahead and markdown the OEM rates to what we have firm orders for and as I mentioned the ranges of output they vary by plant depending on the.
What's the channel inventory between us and the Oems, but.
To have Airbus producing it at 47.
Month in Q2 headed to 50 fives within six months and then go into 65 six to nine months after that to me to have the Max at 31, yes. They did push it to the right, but it should step to 38.
Maybe second quarter of 'twenty three calendar and then on the way up into the <unk> and 'twenty four so for US we're starting to see the benefit of that benefits our absorption on SG&A and overhead our supply chain, we're going to burn off that excess inventory that Jim mentioned, even the 787 rates.
We've taken them down to approximately two a month.
We used to do 14, so when that program gets back to five or 10, its going to be huge upside for trial we.
We are watching engines, there was a slowdown in the quarter on engine deliveries and those are starting to come back we get signals from the Oems.
It looks like we've done enough derisking.
And start ramping up again, so I think there is some give and take between engines and air framers, but.
Our rates are we have confidence in our rates.
Thank you very much.
Thank you.
Our next question comes from Michael <unk>.
Charlie Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions here can I just.
Go back to the free cash flow, Jim I want to make sure I understand last quarter, you had core free cash flow or breakeven of $15 million and that included roughly $70 million of one timers now you think the one timers are down too.
20 million you don't talk about core free cash flow you just have 60 to 70. So should we think about the apples to apples year to 15 is now negative 40 to negative 50 on inventory or just help us reconcile what the apples to apples as last quarter to this quarter.
Yes, so we've temporarily use that term core free cash flow of the Stewart was still in the portfolio now that Stuart's out we went back to what we've always used which is consolidated free cash flow.
All of our businesses are continuing including the interiors business. That's in the structure segment remaining. So we include all of that cash flow. So we're no longer breaking out core versus noncore.
Businesses are continuing right now.
So I hope that answered the question, but I'm happy to entertain any follow ups.
Yes.
Cash flow weekend, then I'm, just trying to get an apples to apples here I mean, the one yes.
The one time associated with the with the legacy businesses that have been reduced have been offset with growth in inventory.
Okay deferred shipments primarily related to supply chain, but a little bit on royalty demand.
Okay, and then how long do you think it takes to unwind that inventory I mean, I know you talked about positive second half and then positive in 'twenty four.
Is that that inventory that working capital hold through second half year do we get more of a burn down as we move into fiscal 'twenty four how should we think about that.
Right now were forecasting it will burn down over the next two quarters.
By the end of the year.
And remember that our business now.
Quicker cycle times, because we used to be 69% systems business now we are at 88% of our sales are from.
The systems business. So we are truly a systems company and that turns a lot quicker than the long the big metallic structures businesses, we used to be more.
And also the diversity is helping us so that no one problem it becomes too big of an issue.
Concentration our largest customer used to be last year, 36% of our sales now stand at 29% and Thats still includes.
Some of the divested business. This year. So it will be in the mid <unk> in terms of our.
Concentration by customer and when you look at the diversity across programs and customers.
It's easier to attack them and not have one big problem.
Got it got it okay. That's helpful and then.
And just one more if I could you mentioned, obviously the challenges, which we're aware of on castings and forgings and I think you talked about using some additive manufacturing for housing heat exchangers can you.
Just elaborate how long does that process take for you guys. How long does it take to get qualified just maybe a little bit more color there.
Yes, it certainly a multi year process, but.
The key is customers.
Saying that the material properties and surface finishes of additive meet.
<unk> the requirements of the products. So we will start out and less stressed components.
Secondary actuation, usually has lower loads than let's say primary actuation like you do for flaps.
And routers and so we can cut it in on some of the.
The metal structures.
That are used in those actuators heat exchangers are very.
Encouraging because most heat exchangers are still made sort of in a tube and thin design that goes back to the eight hundreds.
And now you can print those so we're going through we've got our first flight hardware on that on those sort of products and use now.
Then we will just get customers to adopt them incrementally this weight savings theres cost savings so.
The value proposition is pretty compelling, but it does take years to cut it in the point being is that we're not.
Wringing, our hands about shortages in the supply chain between low cost sourcing.
Our efforts on additive we're going to do permanent solutions to what's been a chronic problem you may recall in the last ramp up 2018 2019 pre pandemic. These were the same bottlenecks we had back then.
It's my understanding that casting and forging providers had serious loss of talent specialized knowledge thats, taking some time to rebuild so we're not going to count on that coming back fully.
Got it perfect. Thanks, Scott Thank you.
Again, if you would like to ask a question. Please press Star then one.
And our next question will come from Ron Epstein of Bank of America. Please go ahead.
Hey, good morning.
Next thing is going to follow up on that question, Michael just assets.
The additive manufacturing.
Realistically I mean, they get that stuff certified so on and so forth I consider a real long time and is that something you'd want to do internally or is that stuff that youre working with manufacturing partners.
Pretty specific domain knowledge to do that and embedded in that.
Area of.
Investments you guys are or not and then how you're thinking about that.
So we invested several million dollars in partnership with GE I want to say three years ago, and we bought a few of the machine more importantly, we talk to them about.
Materials selection in the powders.
Best applications.
And triumph didn't acquire the machines to get into the printing business. The future is you design for additive upload the designs to the cloud and then the parser.
Dropped by grown.
By the Doc I mean, that's it's going to be something that you can source.
But so many of our products will benefit from it so you're having an organic capability allows you to learn how to design for it so right now fuel pumps.
Actuator housing gearbox housings.
Our all right.
Applications for this so our engineers are excited, especially the younger ones coming into the company because most universities now of three D. Printing is core curriculum do they want to do that when they get out in practice. So we're partnering with the agencies that have.
The strongest voice and certification like right Pat.
We went up to the Air Force Technology Labs, we showed them what we're doing in the analysis that we've done on the strength of the parts and they are helping us with the cut and the same thing will be required with NAV are very deep technical ranks.
And then our military customers will.
Will follow suit on the commercial side.
They will they will also benefit from.
What's happening already on the engines.
<unk> brought us a lot about what they've been able to achieve on commercial jet engine additives.
As an example, so long term im confident it will try to find a way to provide more quantification of its adoption for for the investors.
Got it got it.
And then you mentioned earlier about bringing some work to India.
And in Thailand.
Was that work.
Currently done was it that <unk> done in another low cost market like China.
So we got out of China pre pandemic.
I've had a plant there in February or partnerships. There was some legacy 747 parts that are made but we had almost no.
Impact from supply chain coming out of China, We had some demand reduction says.
MRO went down because they were flying less but not on the supply side. So there was more parts that were being sourced from U S. Europe .
Other markets that were higher costs.
And I said in my head of supply chain, there and he came back and said you wouldn't believe the level of investment that India is putting into A&D and serious capacity. So we're going to ride that wave we already have a plant in Thailand, one of our best plants MRO plans.
So we have some experience in that market and they're sourcing locally there. So it's just the natural progression of voice to take cost out.
And we're going to follow up.
I also want to say that more manufacturing done closer to the end markets is the trend so.
So the partnership with Mubadala sounded in the UAE is going to support not only the middle East region, but India since a lot of air traffic is going to go through the middle East.
And to India and by having a presence in Thailand, as China Reopens, we expect to get a tailwind there and we look forward to expanding our air France, JV from the Americas and Asia.
Got it got it got it and then maybe just a quick question on the balance sheet.
As you all look into 2024 and then there's the most open question about refinancing.
Have you had any change in thoughts there I mean, that's that's a question we frequently get from investors.
I will try up to the refinancing and so on and so forth.
No.
Change on that front since the last quarterly call.
So really nothing has changed other than.
We continue to develop our specific strategies.
The criteria on which we would execute.
We're looking for those windows to open up in the market right now the high yield market is pretty closed.
And we don't have to go to market right now because we have a runway for 18 months.
So we're going to continue to improve the underlying business with better profitability cash flow. So we'll get the best rating in the best terms of execution when the time comes.
But nothing has really changed its going to be opportunistic on execution and we're going to improve the business at times on our side.
Got it all right. Thank you.
Yeah.
The next question is a follow up from Sheila.
Of Jefferies. Please go ahead.
Thank you Dan sorry, that's taking on one question.
In terms of just the inventory you said you heard the bolt I was just wondering what are you guys using inventory just pre buying raw materials that you are seeing lead times stretch on R&D.
Or is that just wiring semiconductors, if you could give some clarity around that and how that unfolds and is it alright.
Max.
Where is that being strained or could we see the supply chain.
And then I noticed payable does not a benefit for you guys.
The other suppliers are you worried at all about smaller tier three tier four suppliers not getting enough bandwagon cash funding are you guys watching that in your supply chain at all thanks.
Thanks, Greg Great question.
No.
Tori we were we started our year.
In April .
We are working to a higher set of 787 and GE leap rates as an example.
And then there were some mark down to those rates and of course.
These orders six months to 12 months in advance of need.
And so that was a bit of a whipsaw on on demand versus supply. So now we're going to burn that off on both programs.
We're not ahead of the game on Max we're closely matched to the Oems rates. There. So we're not impacted by any.
Temporary flat spot on the Max so.
I would say that would be the <unk>.
Sure.
It's less raw materials, I think that only accounted for about $7 million of inventory growth in the quarter. It's more about work in process. So its parts that we have and we're waiting for the last few parts from the supply chain to complete a kit. So we can ship a product ring. The bell book the sales get the cash so thats the biggest <unk>.
Ponant that was up maybe $30 million in the quarter and when we say we're going to burn it off in the second half of the year as those last few remaining parts what I call on time in full.
Come in we'll complete those assemblies shipped the product and then <unk>.
The sales we looked at our second half of the year as to whether it's meaningfully higher than prior year and its single digit increase over prior year.
<unk>.
Revenue and earnings and cash is not a huge step up so we can do it in.
Everybody I've talked to my peer group is seeing the same.
I think in terms of slow incremental improvement of supply chain is not get worse, but it's not going to be solved overnight on payables.
And tier three suppliers.
We've done two things, one we start giving them longer.
Horizon forecast too.
<unk>, we started giving them longer lead authorization.
And three we worked with them to help them.
With additional roles within the company other programs that can support.
We haven't had any.
Bankruptcies, we've had a couple of suppliers that were at quality issues. So we've had to deploy teams into them to to help them get back on track.
Again, castings and housings tend to be.
The constraint, but there.
There hasnt been a financial.
MPT.
Barrier for them to form Jim.
Yeah, Thanks, Dan I think you've covered it pretty well.
From a pure purely financial perspective, it's the width. So the work in process has gone up but if you look at what's the root cause is the on time in full.
Waiting for that those last few parts to fill out the bill of materials.
But we haven't seen very dramatic growth in raw materials, it's really in the process. So we have to balance that.
And we are working with suppliers that are challenges.
And we're making progress so looking forward to Bernie I think we have about $40 million of past due were expecting the burn down by the end of the year, just one last point Sheila Quest.
A question that Cai asked earlier about <unk>.
Rates and you mentioned V 22, if you look at page 16 in our.
Backup data five of the top six programs in our backlog are all going up in rates.
And between volume and new pricing that we've secured.
We feel very good about this being the core driver of both volume to drive inventory burn off and then cash and margin expansion.
Great. Thank you guys. So much thank you.
This concludes our question and answer session and triumph group's second quarter fiscal year 2023 earnings conference call.
This call will have a replay that will be available today through November 15 at 11, 59 PM Eastern standard time.
Can access the replay by dialing one 401.
Sorry, 17008, Inc, or <unk>.
One 877, sorry.
Sorry, four four.
Seven five.
I'm <unk>.
The access code 1319709, Thank you for attending today's presentation and you may now disconnect.
Okay.
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